Knowing the difference between an independent contractor and an employee is essential for business owners who plan to do any hiring. Business relationships between workers and employers affect employment taxes, and incorrectly classifying someone as an independent contractor may cost you money. The Internal Revenue Service has a set of guidelines rather than a predetermined checklist for classifying workers for tax purposes. Workers may be considered employees, statutory employees, statutory non-employees or independent contractors.

Employees

Classification is centered on how much control the business owner has over the worker. If you dictate the details of how work is done, the person completing the work is your employee. If you purchase supplies and determine how payment is handled, your worker is also more likely to be considered an employee. Benefits and the importance of a worker&amp;#039;s role in the business are other important factors.

Statutory Workers

A statutory employee is an independent contractor who may be treated as an employee in certain employment tax situations. He must work for you on a regular basis, and must not have made a major investment in non-transportation supplies. Licensed real estate agents and direct sellers may be considered statutory non-employees. Statutory non-employees are considered self-employed for tax purposes, provided most of their income comes from sales and not hourly pay. They must sign a contract agreeing not to be treated as employees.

Independent Contractors

Independent contractors generally seek out work from a variety of clients. They are paid on a project-by-project basis, not by the hour. Even if you calculated payment based on a certain number of hours, the worker will be paid the same amount-even if he completes the work in more or fewer hours than the amount upon which the estimate was figured.

Employment Taxes

In addition to withholding federal income tax from employees&amp;#039; pay, you must withhold Medicare and Social Security, and match the amount withheld. You are also required to pay federal unemployment tax, or FUTA, separately from other taxes. Independent contractors are required to provide their taxpayer identification numbers by filling out and returning form W-9 to you. You are also obligated to submit form 1099-MISC to independent contractors by Jan. 31. This form is the independent contractor&amp;#039;s version of a W-2.

Form SS-8

If, after reviewing all of the information, you still find yourself unsure of a business relationship with a worker, fill out Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The Internal Revenue Service will make an official judgment of the worker&amp;#039;s status. Workers may also submit this form to the IRS.

Misclassification

If you classify workers incorrectly without justification, you may be required to pay their employment taxes. An appeal process allows you to counter claims with proof that your business relationship is not that of employer and employee. Incorrectly classified workers can fill out Form 8919, Uncollected Social Security and Medicare Tax on Wages, and submit it to the IRS.